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Despite claims to the contrary the Chinese are savvy capitalists and even savvier traders. Consider the stockpiling of commodities at recent lows and the subsequent sales being made at elevated prices. The trading acumen extends to the Treasury market as well.

To understand the Chinese slight of hand we must first understand the classifications in the TIC data. The country to which a T-bond/note purchase is attributed may not be the country that is ultimately the owner of the security. If a foreign entity purchases Treasury bonds through a British investment bank then the purchase is attributed to Britain.

uk-holdings-of-us-debt

Looking at the TIC reported holdings of Treasury securities we find that the United Kingdom has increased its holdings by 289% over the last year. In June 2008, the UK purchased $55 billion in Treasuries while in June 2009 the UK purchased $214 billion a $51 billion increase from May.

At first read, one might assume that the British are snapping up US debt, but remember the UK is major financial center. The increase in UK purchases of debt is more likely attributed to foreign entities (read China) simply placing buy orders through UK brokers. In this way, purchases are disguised and the Chinese appear as though they are selling Treasuries.

Additionally, the TIC data showed private buyers of Treasuries surged in June. Once again, the nomenclature is misleading. Private foreign buyers include international and regional institutions which count sovereign wealth funds among the ranks.

private-purchases-of-us-assets-august-20

So while it may appear that official purchases from China have declined, it is highly likely that they are simply using the SWF to purchase securities through a UK bank. Ultimately these securities can be transferred to the official reserves and evade Treasury detection.

In a blatant attempt to strike fear in the heart of Tim Geithner, China Daily ran a front page story touting the Chinese reduction in holdings of US debt. China Daily is a state run newspaper and is often used as a propaganda tool for the Chinese government. In this case, the tool is doing its job.

Disclosure: Long IEI